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Common Cash Flow Issues for Small Business Owners

Phil Cohen

For small business owners, cash flow problems are a common and dangerous threat to the survival of their companies. In fact, a study by U.S. Bank reveals that small businesses and startups fail 82% of the time due to a low cash flow.

A business is considered to have cash flow problems if they are spending more money than they are making in a given period of time. Obviously, no entrepreneur wants to lose money like that. So what are the biggest reasons that small businesses and startups run into cash flow problems?

Top Reasons Small Businesses and Start-ups Run into Money Problems

1. Too much startup spending

You are no doubt familiar with the old adage “you have to spend money to make money.” While that is true, to an extent, it is also very easy to go overboard with self-investment when you are creating your company. Many times, money is wasted by startup companies because they are not attentive to the cost of the expenses relative to the pricing of their products. Money management comes down to making sure that your spending is backed by your earnings.

2. No cash flow budget

Monitor your cash flow. Whether daily or weekly, it is so important for business owners to keep track of their revenue compared to their expenditures. If you keep records, you can never be surprised by a sudden lack of funds, and you will also be able to understand which strategies work the best for your company.

3. Overestimating future growth

Never count on your company to suddenly hit a boom in business. Consult your records, analyze the data, and stay loyal to your calculations regarding growth. If you can’t find statistics to support your hunch that your business is about to grow, then it is not safe to assume that it will.

4. Slow collection of accounts receivables

There is potentially nothing that is as frustrating as waiting for your debtors to pay off outstanding invoices. Your clients and customers can be unreliable, late in payment, and ultimately, a huge obstacle to turning a significant profit. When you make a sale, you need to be able to count on getting your cash in return so that you can invest it into future business endeavors.

Preventing Problems for Cash Flow

Cash flow problems can be prevented and solved through careful preparation and implementation of the right strategies. Here are several approaches to consider:

1. Build a cash reserve: Start by creating a cash reserve for your business. Develop a budget that outlines your current and future expenses, which will help determine the size of the reserve. Aim to set aside enough funds to cover a few months’ worth of business expenses. To build the reserve, allocate a portion of your revenues to a separate savings account and avoid using it for anything other than emergencies.

2. Encourage prompt invoice payments: Offer incentives to clients for paying invoices faster. For example, provide a 2% discount if payment is made within 10 days. Alternatively, consider invoice factoring to improve immediate cash flow. This involves selling unpaid invoices to a third party for a fee, ensuring you have available funds and can confidently offer payment terms.

3. Manage expensive debts: If you have high-interest loans, explore options for refinancing them with lower interest rates, longer payment terms, or debt consolidation. Restructuring your debt can reduce monthly payments and alleviate financial strain.

4. Control overhead expenses: Regularly assess your business expenses and identify areas where you can cut back without negatively impacting operations. Ensure you strike a balance between cost-cutting and maintaining necessary resources. Conducting periodic expense audits can help keep your overhead in check.

5. Optimize inventory management: Aim to minimize excess inventory by fine-tuning your purchasing and sales processes. Monitor inventory levels closely, and only stock items for the shortest possible time before they are sold or used in manufacturing. For businesses engaged in product resale, consider purchase order financing or supplier financing to manage large sales that surpass your cash flow capacity.

6. Maintain accurate bookkeeping: Establish an organized bookkeeping system and ensure it remains up to date. Seek professional assistance if necessary, such as hiring a bookkeeper or outsourcing the task. Keeping accurate financial records helps you make informed decisions and avoid potential cash flow issues.

7. Regularly review financial statements: Stay on top of your financial statements by reviewing them frequently. This practice, ideally on a weekly basis, allows you to identify any potential red flags or areas of concern promptly. However, it is crucial to maintain an up-to-date accounting system for accurate financial reporting.

8. Accurate sales forecasting: Properly forecast sales to avoid underestimating or overestimating revenue. Have an emergency cash reserve, consider outsourcing or hiring temporary employees during periods of growth, implement conservative growth plans, and explore renting assets instead of purchasing them initially.

9. Prevent employee theft: Minimize the risk of employee theft by implementing robust screening procedures for new hires. Implement checks and balances for employees in sensitive positions, consider using video cameras in key areas, obtain a bond for certain employees, and conduct regular audits to maintain transparency and security.

10. Manage seasonal demands: Establish a reserve fund specifically dedicated to covering expenses during the low season. Develop a reliable process for accurately forecasting sales and expenses, considering the effects of seasonal variations. In extreme cases, a line of credit can be used as a last resort to help bridge financial gaps during slower periods.

The Invoice Factoring Solution

There are so many different reasons that your small business or your startup can run into cash flow problems. Luckily, for all of those problems, there is one solution—invoice factoring. Invoice factoring is the best source of alternative financing available to small business owners and startups, and its specialty is increasing cash flow and preventing the aforementioned problems. In many cases, it is much easier to get invoice factoring than a conventional bank loan. Through invoice factoring, you will be able to obtain funding debt free. Bad credit? No problem! Invoice factoring approval is based on the credit history of your customer, not you.

When you work with Factor Finders, the wait to collect dues from your outstanding accounts receivables becomes a thing of the past. Instead, you are given debt-free working capital that will increase your cash flow and help your business thrive. Interested? Get your free quote today!

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Phil Cohen

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